Nov. 23, 2021

US Tightens, While China Relaxes Monetary Conditions.

I really can't remember a time when the two major economies in the world are set to head in opposite directions. But that may be what's setting up right now.

For those of us in America, the talk throughout the financial press is constantly about inflation. As consumers we see higher prices every day: from food to gas to major purchases, Everything is priced higher now than it was at just the beginning of this year.

The American public is looking for relief. And, at least in part, President Biden delivered by renominating the more bearish candidate for Fed Governor, the incumbent Jerome Powell. Of all the candidates presented Powell is the most likely to continue the taper, that is the reduction of bond purchases by the Fed. While he is also most likely to raise interest rates. Wall Street currently estimates that the Fed will raise interest rates beginning next summer.

So in terms of monetary policy, the US has begun its tightening, by beginning the taper. And is set to continue tightening, at least through the mid-next year, assuming they stay on the same course.

China is the polar opposite of this. China looks to be ready to loosen its monetary policy. On Friday, the Peoples Bank Of China released their latest quarterly monetary report. And most analysts agree that the report is signaling an easing directly ahead.

Throughout the report, the PBOC is emphasizing growth. And the need for China to grow out of its current economic malaise.

Whereas, here in America, the Fed is emphasizing price. That it's inflation that we need to fight.

And that's the classic dilemma of Stagflation. Low to no growth, while at the same time suffering through higher prices.

It's a situation that this country was last in back in the 1970s.

During that time we had two Presidents Richard Nixon, and Jimmy Carter, who followed the same path as we are currently on: fight the battle of price. Nixon with his wage and price goals, Carter with his bundle up, lower your energy usage, drive slow.

The goal, by both administrations, I consider Ford to be just a continuation of the Nixon Administration, was to control inflation. The result was a lost decade of economic growth.

It took Ronald Reagan to promote growth in the economy, deregulation, lower taxes. That finally began a process of recovery. The result was spectacular economic growth, that lasted for nearly two decades, and presented the longest-running bull market in stocks in history.

Growth, not price, is always the answer.

A lesson that China, at least for now recognizes. While the US apparently does not.